Compensation benchmarking, also known as salary benchmarking, is a critical strategy for any company aiming to attract, retain, and motivate top talent. When done right, it offers businesses valuable insights into competitive pay ranges, ensuring fairness and consistency across roles and departments. When done wrong, however, it can lead to underpaid or overpaid teams, low morale, high turnover, and a tarnished employer brand.
Unfortunately, many companies fall into common traps when attempting to benchmark compensation. This article breaks down the biggest mistakes organizations make—and offers insights on how to avoid them—so you can make better, more informed decisions about your pay structures.
Misunderstanding What Compensation Benchmarking Actually Is
At its core, compensation benchmarking is about comparing your company’s salary and benefits packages with those of competitors in your industry, region, or job market. This includes not just base salary, but bonuses, stock options, benefits, and even intangible perks like flexible work hours.
Where companies go wrong:
Some businesses believe benchmarking is simply grabbing salary data from a free online source and adjusting numbers based on gut feeling. That’s not benchmarking—it’s guesswork.
A better approach:
Compensation benchmarking should be based on credible data sources, well-defined job descriptions, and up-to-date market trends. Ideally, companies should use at least two or three reputable salary survey providers or market data platforms. One of the most powerful approaches is using compensation analytics platforms that provide real-time insights, data visualization, and market alignment indicators.
Example: A company might assume the average salary for a software engineer is $85,000 based on an outdated report. However, using data from multiple providers shows that the market range is actually between $100,000 and $125,000 in their region. Underpaying by that much can lead to loss of talent—even before you hire them.
Benchmarking Against the Wrong Market or Competitors
Not all companies are created equal—and the same goes for pay scales.
A common misstep:
Benchmarking against companies that are either too large, too small, or in entirely different sectors can result in an inaccurate picture of what fair pay actually looks like.
For example:
A 50-person tech startup shouldn’t compare its compensation packages to those of Google or Amazon. The discrepancy in budget, brand value, and stock benefits would make the comparison misleading.
The better route:
Use a combination of industry, company size, geography, and job function when selecting your benchmark group. Narrowing down to a group of five to ten comparable businesses often yields the most relevant insights.
Key factor:
Location still plays a role—even in remote work environments. A remote employee living in San Francisco might expect a very different salary than one in rural Kansas. Smart companies factor this into their benchmark models.
Failing to Update Compensation Data Regularly
Market dynamics shift constantly. In the last three years alone, salaries for roles like cybersecurity analysts and data scientists have surged by up to 18% annually, while others like general administrative roles have seen far slower growth.
What companies miss:
They set pay ranges once—perhaps during the company’s founding—and never revisit them again.
Why this is risky:
Outdated compensation benchmarks not only leave your company lagging behind in talent acquisition but can also demoralize current employees when they realize their peers at other companies are earning more.
The fix:
Build a habit of reviewing and adjusting salary bands at least once per year. In fast-moving industries like tech, you may even want to do it twice a year. This proactive approach becomes even more vital as AI continues to reshape job opportunities, causing rapid shifts in demand and compensation for certain roles.
Pro tip:
Use compensation trends data in your annual strategic planning process to make sure your budget aligns with your hiring needs.
Ignoring the Total Rewards Perspective
Benchmarking compensation isn’t just about salary—it’s about total rewards. Yet, this is one area where many organizations fall short.
Common oversight:
Focusing only on base pay without considering bonuses, stock options, health benefits, paid time off, wellness programs, or other perks.
The impact:
Candidates and employees today evaluate offers holistically. A slightly lower base salary might be perfectly acceptable if it comes with significant performance bonuses, generous leave policies, or career development programs.
A useful comparison:
Imagine Company A offers $90,000 base salary with standard benefits. Company B offers $85,000 base salary, a 10% performance bonus, free health insurance, and unlimited PTO. For many candidates, Company B will be more attractive—even though the base pay is lower.
Tip:
When benchmarking, assign a dollar value to benefits where possible. Tools like total rewards calculators can help translate those intangible perks into comparable financial figures. Incorporating internal mobility and retention strategies into your rewards model can further enhance employee satisfaction and reduce turnover.
Lacking Internal Alignment and Communication
Even if your benchmarking process is rock-solid, it won’t help much if leaders and HR teams aren’t aligned—or worse, if employees don’t understand how their pay is determined.
The issue:
Companies often conduct benchmarking in silos. HR or finance may work on it, but managers are left out of the loop. Or worse, no one communicates the findings to employees, leading to confusion and resentment.
The result:
Employees may feel their compensation is unfair even if it is aligned with the market—simply because no one explained the logic behind it.
How to solve this:
- Train managers to understand compensation philosophy and benchmarking processes.
- Create transparent pay frameworks or salary bands.
- Offer employees a clear view of how their compensation compares within the company and to the market.
Additionally, companies that foster alignment between compensation and company culture benefit from better retention. Understanding cultural fit is key to ensuring that your pay strategy supports long-term engagement and satisfaction.
Bonus Mistake: Believing One Size Fits All
Many companies attempt to apply the same benchmark strategy to every role, regardless of level or function.
But here’s the thing:
Roles differ in competitiveness and availability. The demand for a skilled machine learning engineer is not the same as for an office administrator.
What to do instead:
Customize your approach based on talent market data for each job family. High-demand, high-turnover roles should be benchmarked more frequently and with more granularity.
Final Thoughts: Make Compensation Benchmarking Work for You, Not Against You
When done well, compensation benchmarking is a powerful strategic tool. It can help you retain key talent, improve morale, and compete more effectively in the hiring market. But when done poorly, it leads to turnover, frustration, and wasted resources.
Avoiding these common mistakes—by using accurate data, considering total rewards, and aligning internally—sets you up for long-term success.
Compensation may be a sensitive topic, but transparency, strategy, and structure can turn it into a strength.